Potential Food Price Shock for China and India

London – If global food prices double then China could lose $161 billion in GDP and India could lose $49 billion, according to a new report released today by the United Nations Environment Programme (UNEP) and Global Footprint Network.

The UNEP-Global Footprint Network report, entitled ERISC Phase II: How food prices link environmental constraints to sovereign credit risk, features a table that ranks countries according to how badly they will be affected if global food commodity prices double. The report is available here.

In the future, the world will likely suffer from higher and more volatile food prices as a result of a growing imbalance between the supply and demand of food, the report notes. Rising populations and incomes will intensify the demand for food while climate change and resource scarcity will disrupt food production.

The report, which was published in collaboration with Cambridge Econometrics and several leading financial institutions, models the impact of a global food price shock on 110 countries to assess which countries face the greatest economic risk from this growing imbalance.

In terms of the highest percentage loss to GDP, the five countries that will be worst hit if food commodity prices double are all in Africa – Benin, Nigeria, Cote d’Ivoire, Senegal and Ghana. But China will see the most amount of money wiped from its GDP of any country – $161 billion, equivalent to the total GDP of New Zealand. India will see the second highest loss to GDP – $49 billion, equivalent to the total GDP of Croatia.

Among the report’s other key findings are:

Overall, Egypt, Morocco and Philippines could suffer the most from a doubling of food prices in terms of the combined impact on GDP, current account balance and inflation.

17 out of the 20 countries most at risk from a food price shock are in Africa.

Paraguay, Uruguay, Brazil, Australia, Canada and the US would benefit the most from a sharp increase in food commodity prices.

Globally, negative effects of a food price shock massively outweigh positive effects in absolute terms. While China could see an absolute reduction in GDP of $161 billion, the highest absolute positive effect on GDP, seen in the United States, is only $3 billion -50 times smaller than the impact on China.

In 23 countries, a doubling in food prices leads to a 10 per cent (or more) rise in the consumer price index.

Countries with higher sovereign credit ratings tend to be less exposed to risks resulting from a food price spike.

Countries whose populations have the highest consumption of natural resources and services, and are therefore most responsible for the environmental constraints that make future food prices higher and more volatile, tend to face the lowest risk exposure.

UNEP Executive Director Achim Steiner said, “Fluctuations in food prices are felt directly by consumers and reverberate throughout national economies. As environmental pressures mount, it is important to anticipate the economic impact of these stresses so that countries and investors can work on mitigating and minimizing risk. And as the global population continues to rise, food prices can be a bellwether for how environmental risk translates to economic risk and vulnerability.”

Susan Burns, co-founder of Global Footprint Network and director of its Finance Initiative, said: “Now more than ever, in this era of climate change, identifying all relevant environmental risks is crucial to investing not only in equities but also sovereign bonds.

“As this latest research shows, disruptions to our food system represent one substantial environmental risk that both investors and governments may be largely overlooking but would be well-served to integrate into their risk analysis.”

The ERISC Phase II report was published in collaboration with Cambridge Econometrics and several financial institutions: Caisse des Dépôts, First State Investments, HSBC, Kempen Capital Management, KfW, and S&P Global Ratings.

The report builds on the first Environment Risk Integration in Sovereign Credit (ERISC) report published in 2012 by UNEP FI and GFN.

The overall objective of the ERISC project is to assesses how environmental risks such as deforestation, climate change and water scarcity affect economies, given that GDP, inflation and current account balances underpin some of the criteria that determine a country’s sovereign credit rating and the cost of borrowing on international capital markets.

UNEP and GFN would like to invite interested parties, governments, banks, investors and rating agencies to work with them to further decipher the link between environmental constraints and sovereign credit risk.

Today’s ERISC report comes ahead of the release of a landmark report on food systems and natural resources written by the International Resource Panel (IRP), a consortium of 34 internationally renowned scientists, over 30 national governments and other groups hosted by UNEP.

The IRP report, which lists a series of solutions that will improve the world’s food system, will be released in Nairobi on 25 May at the United Nations Environment Assembly – the world’s de facto Parliament for the Environment.

About Global Footprint Network

Global Footprint Network is an international research organization that is changing how the world manages its natural resources and responds to climate change. Since 2003 Global Footprint Network has engaged with more than 50 nations, 30 cities, and 70 global partners to deliver scientific insights that have driven high-impact policy and investment decisions. Global Footprint Network’s finance initiative helps financial institutions quantify and integrate environmental risk in their investments, credit ratings, and country risk analysis.

The United Nations Environment Programme Finance Initiative (UNEP FI) is a unique global partnership between the United Nations Environment Programme (UNEP) and the global financial sector. UNEP FI works closely with over 200 financial institutions who are Signatories to the UNEP FI Statements, and a range of partner organizations to develop and promote linkages between sustainability and financial performance. Through peer-to-peer networks, research and training, UNEP FI carries out its mission to identify, promote, and realise the adoption of best environmental and sustainability practice at all levels of financial institution operations.

The United Nations Environment Assembly (UNEA) is the world’s most powerful decision-making body on the environment-the de-facto “Parliament for the Environment”- and responsible for tackling some of the most critical issues of our time. The assembly holds the power to dramatically change the fate of the planet and improve the lives of everyone, impacting everything from health to national security, from the plastic in our oceans to the trafficking of wildlife. Thanks to UNEA, the environment is now considered one of the world’s most pressing concerns alongside other major global issues such as peace, security, finance and health.

This year, hundreds of key decision makers, businesses and representatives of intergovernmental organizations and civil society will in May gather at UNEA-2, taking place at the United Nations Environment Programme headquarters in Nairobi, for one of the first major meetings since the adoption of the 2030 Agenda for Sustainable Development and the Paris Climate Agreement. The resolutions passed at UNEA-2 will set the stage for early action on implementation of the 2030 Agenda, and drive the world towards a better future, more-just future. UNEA-2 is also inclusive, with Myunea allowing citizens to feed their concerns into the meeting and take personal ownership of the collective challenges we face.